Real Estate Finance: Lessons that Ghana can draw from the rest of the world

17 May 2019

Written By: Alexander Ayertey & Emmanuel Amoah-Darkwa

A report by the department of economic and social affairs of the United Nations in 2018 shows that 55% of the world’s population is domiciled in urban areas; a proportion that is expected to gain an additional 13% by 2050.

Recent projections have shown that the perennial exodus of rural population into urban areas together with an overall increase in the world population has the tendency to add 1.2 billion people to the urban population by 2050. A whopping 90% of this tremendous change is prognosticated to occur in Asia and Africa. The world’s urban population growth in the last 68 years has been prodigious; in 1950 the urban population of the world was 751 million. This number has inordinately risen to 4.2 billion in 2018.

As at 2016, the total population of Africa was estimated to be 1.225 billion, representing 17% of the total world population. The projections made by the United Nations suggest that the total population of Africa may be 2.5 billion in 2050. All these forecasts give a vivid description of the growing urban population in Africa but the mortgage market in Africa becomes relatively small when international comparisons are made with developed economies.

This imbalance can mainly be attributed to the high poverty levels on the African continent. A typical example can be seen in Sub-Sahara Africa; with about 48.5% of the total population living on less than USD$ 1.25 a day. Sub-Saharan Africa is considered the poorest region in the world. High unemployment rates, persistent low-income levels and poor access to financial services have been some of the reasons for this unpleasant economic condition in this region.

The mortgage market in Sub-Saharan Africa is a nascent one; South Africa, Namibia and Cape Verde are the only countries with a mortgage market that represented more than 17% of their GDP. Deposits from customers have been the major source of funding for the mortgage portfolios of financial institutions in this region.

This routine clearly shows that financial institutions in this region are deprived of long term funding that is the most ideal form of funding for mortgage markets. This challenge is coupled with legal constraints that are associated with securing a clean title to an estate and a cumbersome eviction process in times of default.

In most countries in Sub-Sahara Africa, the lack of healthy competition in the banking sector, combined with high transaction cost, credit exposures and crowding out effect perpetuated by unscrupulous borrowing of successive governments have collectively contributed in restraining the growth of the mortgage markets in the region.

In the developed economies, real estate developments have been a fulcrum for economic growth. In 2018, construction on real estate developments contributed USD$ 1.15 trillion to the economic growth of the United States. This represents 6.2% of the GDP of the United States. Real estate construction is labour intensive; this partly explains why the drop in the real estate construction contributed hugely to the unemployment rate during the recession.

The 2008 financial crisis was triggered by the consistent falling of prices of houses. Close to half of the loans that were issued between 2005 and 2007 were subprime. The banks at the time used these mortgages to support large amount of funds in derivatives. The banks folded the subprime mortgages into mortgage-backed securities which were sold as safe investments to pension funds among other parties.

With the America International Group Inc. as the main issuer, the credit default swaps were considered to be insured. When the borrowers defaulted, this set the slippery slope to the recession in motion as the questionable value of the mortgage-backed securities began to prevail. The American International Group became illiquid.

This meant that investment banks like Lehman Brothers and Bear Stearns which had a lot of mortgage-backed securities on their books became unattractive to other banks as they were shunned entirely.

The fall of Lehman Brothers; the fourth largest investment bank in the United States before bankruptcy was declared began the 2008 financial crisis.

In Sub-Saharan Africa, almost all the financial institutions that ply their trade in housing operate with the collateralized loan products which are costly and only suitable for short term real estate projects. Nonetheless, the mortgage market in Sub Sahara Africa is full of potential that will be of interest to investors.

In June 2013, the Nigeria Mortgage Refinance Company Plc was incorporated as a limited liability company registered with the Securities and Exchange Commission with the core mandate of refinancing mortgages. Stupendous arrangements like this one and the laudable mortgage market reforms that have been made by South Africa and Tanzania in recent times is a step in the right direction.

According to the World Bank, Ghana had a total population of 28.83 million in 2017; out of this population, 54.68% represented the urban population. This shows the urgent need of housing for a growing urban population in Ghana as more than half of the total population resides in urban areas but the history of mortgage financing has been checkered with many unsustained methods of housing financing.

In a study that was published by the department of research of the Bank of Ghana in 2007, it highlighted that many financial institutions have offered mortgage facilities to the working class. Notable among them is the Social Security and National Insurance Trust (SSNIT), State Insurance Company (SIC), Social Security Bank (Now Societe Generale Ghana Limited) the defunct Bank for Housing and Construction (BHC), Home Finance Company (HFC) and First Ghana Building Society (FGBS).

The mortgage activities of these financial institutions were impeded by the high interest rates in the banking sector. This situation restrained the impact of these financial institutions in the mortgage market thereby making housing facilities only accessible to middle income and higher income groups who could access less costly loans in developed economies.

The housing facility was beyond the reach of the majority of the working class in Ghana. The situation has not improved as the disparity between the rich and the poor continues to widen.

To develop the mortgage market in Ghana, a fully-fledged mortgaged industry, which is characterised by two major markets, is required. Thus the primary mortgage market where transactions between financial institutions that originate and service housing finance are carried out and the secondary mortgage market where existing mortgages are traded. These intertwined markets are exposed to the changing monetary developments of both domestic and global economic trends.

A well-functioning mortgage market has the capacity to increase funding for housing at a competitive cost and pricing. But this primary function of the mortgage industry cannot be carried out in isolation from the domestic economy. A vibrant mortgage industry thrives on a stable macroeconomic environment, an efficient regulatory framework that ensures a secure, transparent land title acquisition and foreclosures. These all-important features make it possible for a mortgage industry to attract long-term finance from other economies. - Business and Financial Times (B&TF)